Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Phil Nadel is Founder and Managing Director at Forefront Venture Partners. He has been a serial entrepreneur for many years, having founded and exited several startups. He is also a published author, frequent conference speaker, and one of the co-hosts of “The Pitch” podcast.
Over the years I have started and sold several businesses myself, and when I exited a few businesses, friends and relatives had asked me if I could help them with their startups – both in terms of advice, but also with investment. So I started investing in startups on casual basis with people I knew. And that quickly grew to investing on more professional and full-time basis over the last 10-15 years. Because I started as an entrepreneur and a founder, it gave me a really good basis for understanding of other businesses that I now see.
The first thing to mention is that we invest in post-revenue companies that are already generating some revenue. It doesn’t have to be a lot, but some. We invest, generally speaking, in seed and Series A rounds and in between Bridge or Extension rounds. In terms of criteria other than post-revenue, we look for great founding teams that are addressing real pain points, real problems their potential customers may have in a large enough addressable market to get us excited. We look for some initial signs of product-market fit early indications and some competitive differentiation. Broad strokes that sort of what we’re doing in terms of geography, we generally invest in the United States and Canada and Israel and we’re open to investing in certain areas of Western Europe as well.
The first step for us is if the company is post-revenue. We are looking at pitch deck in order to get a sense of whether it is a fit for us or not. Startups can inquire on our website or just send a deck to us. That’s the best first step. We are looking for those criteria I’ve mentioned, like the size of the market or how they acquire customers. That’s the best way to start for us.
Oh yes! We literally see thousands of pitches every year. There is a wide range of quality of pitches. Some are excellent and captivate our attention right away, and most of them are not and can be anywhere from good to terrible. There are always top 1 or 2 percent, when, after listening to the pitch, you say “Wow! I really want to invest in that company.” It’s always great when you hear a pitch like that.
Experience is, probably, the most important – particularly with pain points they are trying to solve and in the industry they are operating in. A well-rounded and balanced team should include not only tech people, but marketing and sales, and finance and cover as many disciplines as possible in a founding team. We also want to know if they worked together as a team before, that’s certainly a benefit. If they had prior exits, that’s the real plus too. These are some of the things that we look for.
We do occasionally; we are not opposed to single founder startups. They have to have a fair amount of experience themselves and lead companies at various disciplines. They have to have a plan for bringing on board and hiring the right team to surround them. Single founders can’t do everything themselves and they should be aware of that and smart enough to think about building up a team to complement their areas of weakness. So, the short answer is “Yes,” but we want to see the plan to build out the whole team.
The truth is – I don’t know, I don’t know them both well enough. I would say, probably with Jobs, although he was very difficult to work with. But it’s not very often that you run into a visionary like him. It would be pretty terrific to work with a visionary like that, although it would be difficult, I’m sure.
We literally review more than one thousand per year, probably multiple thousands. Many of those don’t qualify just because they are at pre-revenue stage, or not in the industry interesting for us, or they are too capital intensive. There are several filters we use right away. May be 10% or so get to the next stage, where we do more thorough review. We end up investing in 8-10 companies a year. As you see, it is a small percentage of the companies we see. It is a tough process. We do more due diligence than most early stage investors – we ask a lot of questions, we require a lot of information. Companies and founders who are not prepared shouldn’t approach us, but if you are prepared, we love to hear from you.
I would say the process takes from 4 to 6 weeks. The first step is reviewing the deck. If it is interesting, we may have a few questions or schedule a call. If we’re still interested after the initial call, we typically ask for some documents, including financial projections, sometimes a sales pipeline; if it is appropriate, we will do a demonstration of the product. We spend a lot of time on the financial projections and try to understand the founder’s thinking that goes into making those projections and assumptions. If we’re still interested beyond that, we talk to some customers, to some other investors, finish our due diligence. As we are one of the largest syndicates, every company we invest in we share with our syndicate members, and that process takes about 2 weeks. So from start to finish it takes 4 to 6 weeks.
Our typical investment amount is $500k.
Unlike most other VCs, we don’t focus on how much we should take. We focus quite a bit on valuation, making sure it is reasonable. We stick with our investment amount, which is $500k or so, and are less concerned with percentage ownership. We invest in companies with valuations between $5 and $25 million USD. Percentage ownership is less important as long as we are comfortable with the valuation relative to the company’s traction.
We’re not working to hit Grand Slams every time we invest. Because we focus on post-revenue companies and we go for some early indications of product-market fit and traction, we’re happy with hitting doubles and triples with occasional home runs. To continue with the baseball analogy: the VCs that try to swing for the fences and are really trying to get 100x-200x-300x returns on their investments are the ones that will invest pre-revenue. To me, it is too much risk to take and you’re not getting rewarded appropriately. If we can get anywhere between 10x and 25x on our investment, we are happy. Sometimes we get more than that, sometimes less, but that’s our expected range.
Red flags will include founders who were unprepared, who don’t know their market well, don’t know their product or industry well. If they don’t understand the addressable market, that’s a red flag. If their financial projections aren’t thought out or their assumptions are shady, that’s, definitely, a red flag. If a team does not understand customer acquisition and lifetime value, if they don’t understand how to acquire customers in a capital efficient way, that’s a concern too. Certainly, on a personal level, if the founders have some questionable activities in the past, that would be a red flag as well.
There are some very interesting companies that are working on breakthrough medical technologies, especially now, around the COVID crisis. Suddenly a lot of companies are working on medicines, vaccines, therapeutics, all kind of interesting stuff. I’m very interested in these, but I would never invest in them. We typically don’t invest in companies that are spending a lot of money on R&D. We invest in capital efficient companies, and those companies are not. Also, there are some interesting applications for VR, and we are open to that field, but we are cautious, because I still believe it’s early to be investing in VR. I think, AR is more timely right now, because there are not so many headsets for VR in use yet. Another area I would mention is this: there are lots of great brick-and-mortar retailers: I’m a huge Whole Foods customer. Still I would never ever invest in brick-and-mortar retail company. These are my examples.
It happens all the time. I’m trying to think if I can come up with a good example to share, but it looks like I try to block them out of my mind, because I find that I can drive myself crazy if I think about them too much. If I hear about such a company now and then, I do try to reflect on the reasons why I passed. I try to revisit that and make sure that every time I pass on a company, I did it for a good reason. I always try to learn from my mistakes.
First, I would certainly recommend my page on medium you can find through our website. A couple of books I’d like to recommend: one is The Lean Startup by Eric Ries and another is
Venture Deals by Brad Feld. those are excellent books and I recommend them to founders.
I’d certainly say that’s Amazon is a breakthrough company, you can’t argue with that. What they’ve done for e-commerce, especially for web services and how they’re shaking up the business – it is a breakthrough. I would also say that Tesla is a breakthrough startup, as well as SpaceX. Tesla has finally been able to commercialize in a big way electric cars and showed that it can make them accessible to a mass audience, which was a challenge. Both those companies – Amazon and Tesla – are led by incredible business visionaries. But there are so many more, like Microsoft, which was, of course, an incredible breakthrough startup as well.
I love what I’m doing. I love talking to entrepreneurs and discovering new growing businesses. I love helping the companies where I can help them to grow and work with them as they scale. I’m in a great place! I’ve been a founder for many years, I enjoyed that. And what I’m doing now – I find very-very satisfying. I’m looking forward to doing it for many years to come.
I would say – go. It’s probably the most complex of those games. It’s a multi-strategy game and too difficult to solve algorithmically. In VC investing there are algorithms that can help, but nothing takes the place of a human entirely, not yet.
It’s both. There are always opportunities during a crisis. It depends on the vision of the founders and whether they can see the opportunities through the crisis, but you always have opportunities there, even more than in more stable times. Still it is very difficult and challenging.